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It appears that many credit card providers are using a payment tiering system to increase profit.
According to Nationwide Building Society, credit card providers make £500 million extra in profit every year by applying payments to the cheapest debt first.
The majority of all UK providers allocate payments to outstanding balances at the lowest rate of interest (for example, 0% balance transfers), with balances at higher interest rates, such as purchases and cash advances, continuing to accrue interest. This, according to Nationwide, leaves 10 million credit card customers paying more interest than necessary.
Nationwide executive director, Stuart Bernau, has made a swipe at competitors, saying : "Any debt counselor worth his salt would tell you to pay off your most expensive debt first, yet most credit card providers do exactly the opposite.
"When you make a payment, they apply it to the cheapest debt first. That makes it more expensive for you and more profitable for them. In many respects, we believe this turns best advice for those in debt on its head, with banks putting profits first and not consumers."
Since October 2003, providers have been obliged to outline how payments are applied in point of sale literature. The information is contained in the Summary Box, which is intended to improve transparency by making it simpler for consumers to compare cards.
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